Question

**Question 3**

**EOQ, ORDERING COST, CARRYING COST, AND TOTAL INVENTORY
RELATED COST (LO 3)**

Franklin Company purchases 4,500 units of Widgelets each year in lots of 500 units per order. cost of placing one order is $22, and the cost of carrying one unit of product in inventory for a year is $8.80.

**Required:**

1 What is the EOQ for Widgelets?

2 How many orders for Widgelets will Franklin place per year under the EOQ policy?

3 What is the total annual ordering cost of Widgelets under the EOQ policy?

4 What is the total annual carrying cost of Widgelets under the EOQ policy?

5 What is the total annual cost of Franklin's inventory policy for Widgelets under the EOQ policy?

Answer #1

1)

Economic Order Quantity (EOQ)

= Sqrt (2 x A x O / C)

Where,

A = Annual demand = 4,500

O = Ordering cost per order = $22

C = Carrying cost per unit per annum = $8.80

So, EOQ

= Sqrt (2 x 4,500 x 22 / 8.80)

= Sqrt (22,500)

= 150 units

2)

Number of orders

= Annual demand / EOQ

= 4,500 / 150

= 30 orders

3)

Total annual ordering cost

= Number of orders x Ordering cost per order

= 30 x $22

= $660

4)

Annual carrying cost of average inventory

= EOQ / 2 x Carrying cost per unit per annum

= 150 / 2 x $8.80

= $660

5)

Total annual cost

= Ordering cost + Carrying cost

= $660 + $660

= $1,320

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